It's beginning to look like the credit union issue de jour is about to change from bankruptcy reform to UBIT thanks to the increasing aggressiveness with which the IRS is going after state-chartered credit unions in more and more states. A lot has happened since I wrote a column on April 2, 2003 entitled: "UBIT Looks To Put Bite On Some Credit Unions." (See definitive news story on page one.) In a nutshell, the IRS bite got bigger! So did the confusion surrounding the issue of Unrelated Business Income Tax (UBIT). A poll currently running on the Credit Union Times Web Site indicates that the number of credit unions that have heard of UBIT has increased in recent weeks. According to the poll, to over 40%. However, about a third of respondents have still not even heard of it. Even those aware of UBIT admitted that they did not know such things as credit insurance and interchange income were being looked at by the IRS as being unrelated to the business of credit unions and thus subject to taxation. UBIT is in reality a not-for-profit organization issue, not just a credit union issue. It impacts over a million n-f-p groups including the American Bankers Association, CUNA, NAFCU, etc. But there is no denying it is rapidly moving up the hot issues chart for credit unions. As it does, there are more questions raised than answers provided. For example, who will educate an IRS that obviously doesn't understand credit unions and what they are chartered to do and has given no indication so far that they care to know? Why are only certain states being singled out? And why those states? Eventually can all state chartered credit unions expect a knock on the door from IRS? Also, where can credit unions turn for help? CUNA Mutual Group? CUNA? NAFCU? State Leagues? NASCUS? State Regulators? NCUA? CPA firms? Who? At this point it appears that CUNA Mutual is taking the lead in providing financial and manpower support to credit unions. From a CU perspective, is UBIT strictly a state-chartered issue? Or is it potentially a broader credit union taxation issue that could at some point impact all credit unions? Will cash-strapped states decide to implement their own UBIT plans? Has the banking industry sparked this sudden new interest by IRS in credit unions? As further proof that UBIT matters need to be sorted out before credit unions start bowing to IRS pressure, some credit unions, but not all, have already been convinced by their accounting consultants that non-member ATM surcharge fees qualify as unrelated income. They may be right, but there needs to be a consistent policy for CUs to follow nationwide before any cash is anted up. One credit union association claims it pays taxes on advertising it runs in its publication. Should they? If yes, should all not-for-profits that sell ad space in their publications including all credit union associations that depend on ad dollars to publish? Discussions by CUNA Mutual, CUNA, and others have led to the conclusion that there are three ways to tackle UBIT head on: administrative, litigation, and legislative. The administrative route would be the safest as far as political fall-out is concerned. Because the IRS is known to be arrogant and uncooperative, however, it would be a long drawn out and thus expensive process. Asking the IRS for its opinions on certain products would be a starting point, but so far they have been typically uncooperative. (Refer to "confusion" comment above.) Litigation is even more costly and very risky. Think about the just-announced most recent banker's lawsuit stemming from the Utah taxation situation. No one can predict how a court will rule, regardless of the facts and merits. Think U.S. Supreme Court prior to H.R. 1151. Suing the IRS and/or being sued by them for non-payment of what they rule is UBIT is not a pleasant prospect. The most dangerous route is legislative. H.R. 1151 started out as a one page bill. It quickly ballooned into a major piece of legislation which ended up saving the day for credit unions, but also causing some unintended consequences that has caused a large number of credit unions to flee the federal charter. The biggest risk in taking this route is that it opens up the Pandora's Box of credit union taxation. Don't think for a moment that the banking industry lobbyists won't pounce on what might start out as a simple UBIT issue and turn it into a wide-open campaign to eliminate the long-standing credit union tax exemption. You can be sure that they will do everything they can to use UBIT as a launching pad for taxation measures for all credit unions, especially the larger ones banks consider to be a threat to their bottom lines. Which way to go? It appears that the biggest issue facing credit unions and those groups representing their interests is to seek coordination by all parties involved in developing a strategy. As various credit union organizations rush to get their ducks in a row to deal with this emerging credit union issue, one thing becomes crystal clear. Individual state-chartered credit unions that have been audited by the IRS and told they owe UBIT should not immediately roll over and pay them. If they do so without a challenge, there will be even more confusion. Worse, precedents will be set from state to state that are inconsistent. The first thing a credit union finding itself in such a position should do is contact a credit union organization for assistance, support, and advice. But which one? Comments? Call 1-800-345-9936, Ext. 15, or Fax 561-683-8514, or E-mail [email protected].